Longer-dated Japanese government bonds gained on Friday as investors shifted durations before a five-day holiday in Japan, while a fall in Tokyo's Nikkei stock average helped underpin JGBs. Super-long JGB yields fell the most and the curve flattened as investors like pension funds sold midterm paper and bought longer-dated debt after the 20-year yield rose to a one-week high on Thursday.
The five-year/20-year yield spread pulled back further from a four-year high hit earlier in the week. The bond market was still capped by uncertainties about how Japan's new government will cope with the shaky economy, with particular focus on its budget policy.
JGB market reaction was limited after new Finance Minister Hirohisa Fujii said on Friday that a cut in issuance of new Japanese government bonds for the current fiscal year could be an option. He did not specify the amount of a possible cut, but said it could be made when reviewing the extra budget that was compiled by the previous government.
"It is difficult for the bond market to react to the comment. Fujii said an issuance cut is an option, which seems to slightly weaken the tone towards any commitment to refrain from issuing fresh debt," said Koji Ochiai, a senior market economist at Mizuho Investors Securities. "Criss-crossing comments from top officials are making it hard for bond investors to assess the situation. The new government seems to lack unity for the time being."
Fujii said he aimed to secure savings of several trillion yen by cutting wasteful spending from the extra budget. The government has already increased new JGB issuance once this year to a record 44.1 trillion yen ($483 billion), up from an initially planned 33.1 trillion yen.
Super-long JGBs were supported on Friday after a relatively volatile week, with the 20-year yield declining 1.5 basis points to 2.055 percent. The 20-year yield fell to a two-month low of 2.025 percent on Monday after the yen's surge to a seven-month high against the dollar prompted firm receiving activity in the yen interest rate swap market.
But the yield climbed as high as 2.075 percent on Thursday, in part due to worries over a potential supply increase under the new government and as investors trimmed some of their exposure to super-long debt earlier in the week ahead of the five-day holiday September 19-23 after the maturities seemingly became too rich, market players said.
The five-year/20-year spread was at 143 basis points on Friday after hitting a four-year high of 148.5 basis points on Wednesday. Longer-dated JGB yields are more prone to rising on supply worries since these maturities do not enjoy the same kind of support from the Bank of Japan's easy monetary policy as short to midterm JGBs. Both the two- and five-year yields hit four-year lows on Monday of 0.200 percent and 0.560 percent, respectively, on prospects of the BOJ retaining low interest rates in the wake of deepening deflation.
On Friday the benchmark 10-year yield edged down 0.5 basis point to 1.335 percent and the five-year yield climbed 2 basis points to 0.625 percent.
After the bull-run earlier in the week the midterm zone has been exposed to selling by domestic banks looking to book profits ahead of the end of the fiscal year half. The Nikkei stock average fell 0.7 percent.
20-YEAR SWAP SPREAD EDGES TOWARDS POSITIVE TERRITORY:
The 20-year swap spread was around -2.7 basis points on Friday, its least negative in almost a year, according to Reuters data. Although still negative, it has climbed steadily after going below -40 basis points last October after a blow-up in carry trades after the collapse of Lehman Brothers roiled the markets, suggesting conditions are slowly returning to normal in the swap market.
"The 20-year swap spread is likely to edge back into positive territory sooner or later as long as financial market confidence continues to improve and asset swappers continue returning," said a trader at a Japanese bank.